I am not one for conspiracy theories. You won’t catch me claiming that Fort Knox is barren of all its gold bars ala John Embry. Or that the US government employs a shadowy Plunge Protection Team to save the stock market from collapsing on big down days as ZeroHedge asserts.
Most of the times market participants claim that the prices are being “rigged”, they are usually just on the wrong side of the trade. So even though I am bearish of stocks, I am not presenting the following observation as some sort of nefarious conspiracy theory. Yet I feel it is still instructive to point out the obviously clumsy goosing of the stock market over the past week.
For the past four days, every morning we have had little news to move the stock market. Usually the S&P 500 future has meandered around aimlessly in the hours before the 9:30AM open. But then, as soon as the market opened, a surge of buying came into the stock market.
Here is the trading on April 2nd; sideways action all early morning and then the buyer wanders in and sends the S&P 500 straight up 15 handles.
Then the next day we had the same scenario play out. Sideways with little direction, and then wham! Up 25 handles in a monster whoosh!
The following day we finally had some sellers waiting for him. He still gave it valiant effort sending it up 10 handles in the first 20 minutes, but then he ran out of ammo.
But he is nothing but consistent, and yesterday he rammed it higher at the open again.
Now ZeroHedge claims that the buying is Citadel hunting for stops. I doubt that. It is far more likely to be a foreign Central Bank like the BoJ or SNB executing a systematic order that needs to be executed regardless of price by a certain time. Whoever it is, the key point is the order is not price sensitive. It needs to be executed and that is why we are getting these whooshes higher. The buyer is demanding liquidity. He is not thoughtfully picking away at an undervalued market. No, he is rushing into the market buying with both fists.
The real question is what happens if he ever turns into a seller? But don’t worry about that, stocks always go up in the long run. Chasing stocks alongside crazed Central Bankers who are monetizing their balance sheets against S&P 500 futures makes perfect sense…
Fed Minutes – it’s just talk
Yesterday’s release of the Fed minutes has caused a bit of a stir. It appears a few of the Fed Governors were closer to pulling the trigger on a hike than the market anticipated.
I want to make a couple of points regarding these mixed messages we are receiving from the various Fed officials. Don’t ever forget David Einhorn’s conclusion after shelling out $250k to have lunch with Ben Bernanke. David realized that the Fed didn’t really have a plan. They were basically just patching problems on the fly. So the reality is that the Federal Reserve committee is hodgepodge of individuals that are reacting moment by moment with little long term thinking.
And if there is any long term thinking, it is erring on the side of being too easy, not the other way round. There has never been a Federal Reserve tightening cycle that has started with the core inflation rate below their target. Given that inflation is currently running significantly below that level, it is going to take a very brave Fed to set the new precedent of tightening in this situation. I will take the other side of the bet that this Fed is brave enough.
Now you could make the argument that the Fed is not starting a tightening cycle but merely retracting the emergency low rate of zero. And that is the message from some of the more hawkish Fed Presidents.
But most of these hawks are like the tough Grade 4 who could “for sure beat up those older kids from the other school.” They always talk a tough game, but when it comes to actually following through, they somehow find an excuse. “Not today, I need to help my Mom with the groceries.” Or “I can’t go over to the other school to wait for them because the principal knows me and will kick me off school property.” The Federal Reserve committee members will always find an excuse to not tighten. Whether it is the strong US dollar or the worries about Greece leaving the EU, there will always be an excuse. It will only be when it is so painfully obvious that rates should go up that they will finally pull the trigger. In the mean time, all this talk about pre-emptive raising is just that – talk. Watch the economic data – that is all that matters. The idea that the Fed will get out ahead of the data is something only ten year olds believe…